Economic Letter

Consumer attitudes about buying and selling homes can inform us about future housing and mortgage markets. The Home Purchase Sentiment Index (HPSI) summarizes data from the National Housing Survey on consumers’ conditions, attitudes, and intentions about housing. The HPSI shows promise both as a stand-alone indicator and as a supplement for evaluating and forecasting housing and mortgage markets. Analysis reveals the index accurately projected strong home sales in 2014 and 2015 and a weaker outlook toward the end of 2016, following the sharp rise in mortgage interest rates.

Now is the right time to ask whether the monetary policy framework and strategy that worked well in the past are well suited to address the challenges ahead. A flexible price-level targeting framework has the important traits of adaptability, accessibility, and accountability. It also offers significant advantages over inflation targeting for meeting price stability and employment goals. The following is adapted from a presentation by the president and CEO of the San Francisco Fed to the Shadow Open Market Committee in New York on May 5.

Insurance companies write policies to cover potential risks far into the future. Because the life of these contracts can extend well beyond the 30-year maturities for the longest U.S. Treasuries, it’s difficult to measure the interest rate risk involved. A new study describes how the long-term interest rates required to evaluate such long-lived liabilities can be extrapolated from shorter-maturity bond yields using a standard yield curve model. These extrapolations are a useful tool since they have very small errors relative to the yield curve variation typically considered for risk management.

Newspaper articles and editorials about the economy do more than just report on official data releases. They also often convey how the journalist and those interviewed feel about the economy. Researchers have recently developed ways to extract data on sentiment from news articles using text analysis and machine learning techniques. These measures of news sentiment track current economic conditions quite well. In fact, they often do a better job than standard consumer sentiment surveys at forecasting future economic conditions.

If inflation increases rapidly, how do we know that higher interest rates will bring prices under control? And how do we know how much of the monetary “medicine” to administer? Economics relies primarily on observational data to answer such questions, while medical research uses randomized controlled trials to evaluate treatments. Applying that method to economics, the long history of international finance turns out to be an excellent laboratory to conduct monetary experiments. These experiments suggest that interest rates have sizable effects on the economy.

The elevated number of non-employed people who are out of the labor force has raised some concerns about how well the headline unemployment rate measures available labor. An alternative measure of labor utilization, the Non-Employment Index, accounts for all non-employed individuals, distinguishing between groups like short-term versus long-term unemployed, discouraged workers, retirees, and disabled individuals, and adjusting for how likely each is to transition to employment. Current data show the index is very close to its value in 2005–06, the period near the peak of the previous economic expansion.

The U.S. unemployment rate fell to a very low level at the end of 2016, raising the question of whether the labor market has become too tight. After applying a new method to adjust for demographic changes in the labor force, the current unemployment rate is still 0.3 to 0.4 percentage point higher than at past labor market peaks. This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.

Population aging and the consequent increased financial burden on the U.S. Social Security system is driving new proposals for program reform. One major reform goal is to create stronger incentives for older individuals to stay in the workforce longer. However, hiring discrimination against older workers creates demand-side barriers that limit the effectiveness of these supply-side reforms. Evidence from a field experiment designed to test for hiring discrimination indicates that age discrimination makes it harder for older individuals, especially women, to get hired into new jobs.

The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U.S. economy? Second, is the natural rate likely to remain low in the future? And third, is this low level confined to “safe” assets? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.